Failure To Allege Lack of Default

Failure to Allege Lack of Default

January 18, 2011 by Dan Edstrom

Failure to Allege Lack of Default

by Daniel Edstrom
DTC Systems, Inc.

I came across the following on Google Scholar (http://scholar.google.com/scholar_case?case=16055101289176414591&q=Restatement+(Third)+Of+Property+(Mortgages)+%C2%A7+5.4&hl=en&as_sdt=2,5):

A. Failure to Allege Lack of Default

First, Nevada law is clear that “[a]n action for the tort of wrongful foreclosure will lie if the trustor or mortgagor can establish at the time the power of sale was exercised or the foreclosure occurred, no breach of condition or failure of performance existed on the mortgagor or trustor’s part which would have authorized the foreclosure or exercise of the power of sale.Ernestburg v. Mortgage Investors Group, No. 2:08-cv-01304-RCJ-RJJ, 2009 WL 160241, at *6 (D. Nev. Jan. 22, 2009) (internal citations and quotations omitted). The plaintiff must establish that they were not “in default when the power of sale was exercised.Id. (citing Collins v. Union Fed. Sav. & Loan Ass’n, 662 P.2d 610, 623 (Nev. 1983)). Furthermore, a claim for wrongful foreclosure does not arise until the power of sale is exercised. Collins, 662 P.2d at 623.

Green Plaintiffs admit that they have breached their loan obligations: “Borrower/Plaintiffs did not pay the payments agreed in the `Note’ . . .” Doc. 35, ¶ 92. In Lopez, Plaintiff Lopez “was unable to continue making payments” and a Notice of Default was recorded. Doc. 59-1, ¶¶ 58, 63. In fact, the Lopez Amended Complaint admits that every named plaintiff had been defaulted or was otherwise behind in their payments. Doc. 59-1, ¶¶ 71, 79, 88, 99, 109, 118. Similarly, the Dalton complaint alleges that at least one plaintiff could “no longer pay the payments” (see 10-81-PHX-JAT, Doc. 2, ¶ 138 (a)) and does not make any allegation that any plaintiff made the payments agreed upon under the terms of their loans. The Goodwin Second Amended Complaint alleges that at least one plaintiff “ceased making payments” (see Doc. 54-4, ¶ 134 (b)) and does not make any allegation that any plaintiff made the payments agreed upon under the terms of their loans. By failing to plead that their loans are not in default, all of Plaintiffs’ claims for wrongful foreclosure are barred as a matter of law and will be dismissed for failure to state a claim. Further, for many of the claims in these actions, Plaintiffs do not allege that the power of sale has been exercised. For these plaintiffs, these claims for wrongful foreclosure are premature and not actionable.

I have discussed this issue many times, but let’s review again.  Look at your note, specifically the section titled “Who is Obligated Under this Note” and read what it says.  The obligated parties are: those who executed the note (signed it as borrowers); those who endorsed the note (which is why they put WITHOUT RECOURSE); and those who act as a guaranty or bind themselves as a surety (add themselves as obligors to the note).  This section goes on to say that all obligors are responsible for payment individually and as a group.

Looking at the Pooling and Servicing Agreement (PSA), the servicers and trustee are required and obligated to make the monthly payments of principal and interest regardless of whether the homeowner makes these payments.  They have been added as obligors along with the borrower under the note.  When you review the governing documents (Prospectus, Prospectus Supplement and the Pooling and Servicing Agreement) along with the monthly certificateholder statements and the monthly loan level files, it becomes apparent that the obligation is being met by those obligated under the note.  The servicers and trustee freely took this obligation on themselves under the terms of the Pooling and Servicing Agreement.  Further, the servicer has to keep track of these advances on a loan-by-loan basis in a separate accounting (a second set of books).  It is their decision to NEVER bring the full accounting into court and explain to judges the true situation, which is that they are obligated along with the homeowner, and have also met the obligation and made the payments.  The trustee and the investors (who they are allegedly foreclosing on behalf of), have received ALL payments as required under the note.  Looking at UCC 3-602(a) we find that payments made by or on behalf of the homeowners discharge the obligation to the extent payment is made.  The servicers and trustees are not disclosing, misrepresenting and failing to disclose the true situation.  In my opinion this is fraud upon the borrowers and fraud upon the court, if only for the reason that the servicers and trustees (and their agents and attorneys) failed to disclose material information.  The homeowners in this case were obviously ignorant of this information which was in the custody and control of the servicers and the trustees.  

Yes it was the homeowners who were making the claims, but it was based on an accounting that was not true or complete.  The homeowner was acting on information provided to it by the opposing parties.  This information was not accurate or truthful.  The opposing parties are supplying the correct information to the trustee, the certificateholders and the ratings agencies, but completely different information to the homeowners and to the courts.   The homeowners relied on this incomplete information to their detriment.  Further, the attorneys for these homeowners were also unaware of the true circumstances.  The reason this information is relevant is because all of the documents used to foreclose in non-judicial states are based on the fact that there is a default.  The Notice of Default, Substitution of Trustee, Notice of Sale, etc.  If the trustee and the investors have received all of the payments, again, how could these documents be truthful and accurate?

This is a travesty of justice that needs to be rectified.

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